Oil Services Under Pressure From the Buck

Play an OIH breakdown with puts

Equities extended their losing streak to a third day Tuesday, with energy stocks bearing the brunt of the bears’ fury. Although the S&P 500 has declined a scant 1% in that time, the current downturn is actually the longest losing streak of the year. Time will tell whether sellers can maintain the upper hand.

Within the energy space, the Market Vectors Oil Services ETF (NYSE:OIH) suffered notably, falling 2.24% by day’s end — with high volume to boot. What’s more, the selling pressure caused the OIH to break below its 50-day moving average, jeopardizing its intermediate uptrend. On the bright side, buyers did step up to defend the short-term support level at $41.50 (black line), causing a minor bounce-back over the last hour of the trading day.

Click to Enlarge Aside from analyzing the price action of the OIH, we also can use ratio analysis to test how well it has performed relative to the S&P 500. As shown in the indicator panel atop the accompanying price chart, since peaking in mid-February, the OIH has underperformed the S&P 500 (red arrow). At a minimum, the relative weakness should lead traders to look elsewhere for bullish plays. For those on the lookout for bearish opportunities, the relative weakness should also increase the appeal of OIH as a candidate.

Click to Enlarge Selling in the energy space likely was exacerbated by continued strength in the U.S. dollar. The Dollar Index climbed 0.31%, testing its six-month high. Strength in the dollar over the past month has undercut any attempt at commodities to stage a sustainable advance. The bottom panel in the top chart shows that the correlation between OIH and the dollar has remained negative for the majority of the time.

One setup to watch for is a breakdown in OIH below the $41.50 level. Continued strength in the dollar, along with a deeper pullback in the broader market, might trigger a breach of the support zone.

With implied volatility still near the end of its 52-week range, a simple put buy to exploit additional downside should suffice. Buy the May 42 put if OIH breaks down. The put currently is trading for $1.10, but if you wait for the stock to confirm the setup by falling below $41.50, the put will be a little more expensive.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.